Permanent Extension of 100% Expensing and Other Depreciation Provisions
The Senate proposal would allow for immediate expensing of qualified property acquired after January 19, 2025, reverting to 100% bonus depreciation on a permanent basis. The proposal provides a transitional election whereby taxpayers may elect to apply a reduced percentage of 40% (60% in the case of longer production period property and certain aircraft) with respect to qualified property placed in service during the first taxable year ending after January 19, 2025. The proposal would be effective for property acquired, planted, or grafted after January 19, 2025.
New section 168(n), as proposed in the House bill, would allow taxpayers to deduct 100% of the adjusted basis of qualified production property in the year in which such property is placed in service, provided such property is placed in service prior to January 1, 2033. Qualified production property includes nonresidential real property such as factories, improvements to existing factories and other structures that meet certain requirements. The Senate version retains the House-proposed section 168(n) with modifications. First, the Senate version would make section 168(n) an elective provision. The proposal provides details regarding how a taxpayer would make the irrevocable election to fully expense qualified production property under section 168(n) and delegates authority to the Treasury Secretary to prescribe regulations with additional guidance. Second, the proposal would limit application of the provision to property placed in service prior to January 1, 2031 (potential extension in the case of acts of God that prevent qualified production property from being placed in service prior to this date). Finally, the Senate version clarifies that use of property by a lessee shall not be considered use by the lessor for determining whether the property is qualified production property, and that food and beverage prepared in the same building as a retail establishment in which the food and beverage are sold will not be a qualified product for purposes of section 168(n). Section 168(n) would be effective with respect to property placed in service after the date of enactment of the OBBB. Our Alert on the House version of the bill provides an additional discussion of section 168(n).
The Senate proposal makes no changes to the amendments to section 179(b) proposed in the House-passed bill. Both the House and Senate texts would amend section 179(b) with respect to property placed in service in taxable years beginning after December 31, 2024, to increase the dollar limitations for expensing certain depreciable business assets, such as depreciable tangible personal property, off-the-shelf computer software and qualified real property that is purchased for use in the active conduct of a trade or business. The proposals would permit a taxpayer to expense up to $2.5 million of the cost of such property placed in service during the taxable year, reduced by the amount by which such costs exceed $4 million, adjusted for inflation for tax years beginning after 2025.
Current Deductions for Domestic R&E Expenditures
The Senate proposal would permanently suspend the application of section 174 to domestic research or experimental (R&E) expenditures paid or incurred in taxable years beginning after December 31, 2024. This is a departure from the House bill, which would only temporarily provide a current deduction for domestic R&E expenditures through December 31, 2029. The Senate version largely tracks the House-passed bill language with only a few additional modifications. Like the House version, the Senate proposal would amend section 174(d) to provide that, with respect to property disposed, retired, or abandoned after May 12, 2025, no deduction “or reduction to amount realized” would be permitted on account of the disposal, retirement, or abandonment of foreign R&E expenditures during the amortization period. However, unlike the House bill, the Senate proposal adds that this amendment shall not be construed to create any inference with respect to the application of section 174(d) with respect to taxable years beginning before May 13, 2025. The Senate proposal with respect to R&E expenditures would be effective for amounts paid or incurred in taxable years beginning after December 31, 2024.
The Senate proposal also provides an election for small business taxpayers meeting the gross receipts test under section 448(c) to retroactively deduct domestic R&E expenditures paid or incurred after December 31, 2021. Generally, a taxpayer meets the gross receipts test of section 448(c) for any tax year when its average annual gross receipts for the three-taxable-year period immediately preceding the current tax year do not exceed $25 million, indexed for inflation.
Any taxpayer with unamortized domestic R&E expenditures paid or incurred after December 31, 2021, and prior to January 1, 2025, would be permitted to elect to accelerate recovery of such costs to the first tax year beginning after December 31, 2024, or ratably over two taxable years beginning with the first taxable year beginning after December 31, 2024.
Adjusted Taxable Income Modification
The House bill would amend section 163(j) to revert to allowing depreciation, amortization, and depletion deductions to be added back for purposes of determining adjusted taxable income (ATI) for a limited period of time extending through December 31, 2029. The Senate proposal, however, would permanently extend this addback, effective for tax years beginning after December 31, 2024. The Senate proposal would also permanently exclude subpart F and GILTI inclusions, as well as the associated section 78 gross-up amounts, from the calculation of a taxpayer’s ATI for purposes of the section 163(j) limitation, effective for tax years beginning after December 31, 2025.
Closing the Capitalized Interest Loophole
The Senate version also proposes a new ordering rule that would apply the section 163(j) limitation on business interest expense prior to any elective capitalization. Under current law, section 163(j) generally applies after application of provisions that subject interest expense to disallowance, deferral, capitalization, or other limitations. The proposal, however, would amend section 163(j) to apply to business interest irrespective of whether the taxpayer would otherwise deduct or capitalize the interest expense. Under the Senate proposal, capitalized interest, other than interest capitalized under section 263(g) or section 263A(f), would be business interest expense subject to the limitation. The proposal specifies that a taxpayer’s allowed business interest deduction would apply first to the aggregate amount of capitalized business interest and then, only if there is remainder limitation, to the pool of remaining non-capitalized interest expense. This provision would be effective for taxable years beginning after December 31, 2025.
Finally, the Senate proposal would amend the BEAT under section 59A to provide that base erosion payments include interest paid or incurred to a foreign related party that is capitalized under any provision other than section 263(g) or section 263A(f), and that base erosion tax benefits include depreciation or amortization deductions, and reductions to gross receipts, attributable to such capitalized interest.
The House-passed bill does not include similar provisions targeting elective interest capitalization.
